IDEAS home Printed from https://ideas.repec.org/p/snb/snbwpa/2015-12.html
   My bibliography  Save this paper

Private information, capital flows, and exchange rates

Author

Listed:
  • Jacob Gyntelberg
  • Mico Loretan
  • Tientip Subhanij

Abstract

We demonstrate empirically that not all international capital flows influence exchange rates equally. Capital flows induced by foreign investors' transactions in local stock markets have an impact on exchange rates that is both economically significant and permanent, whereas capital flows induced by foreign investors' transactions in the local government bond market do not. We relate the differences in the price impacts of capital flows to differences in the amounts of private information conveyed by these flows. Our empirical findings are based on novel, daily-frequency datasets on prices and quantities of all transactions undertaken by foreign investors in the stock, bond, and onshore FX markets of Thailand.

Suggested Citation

  • Jacob Gyntelberg & Mico Loretan & Tientip Subhanij, 2015. "Private information, capital flows, and exchange rates," Working Papers 2015-12, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2015-12
    as

    Download full text from publisher

    File URL: https://www.snb.ch/n/mmr/reference/working_paper_2015_12/source/working_paper_2015_12.n.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. King, Michael & Sarno, Lucio & Sojli, Elvira, 2010. "Timing exchange rates using order flow: The case of the Loonie," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2917-2928, December.
    2. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
    3. Killeen, William P. & Lyons, Richard K. & Moore, Michael J., 2006. "Fixed versus flexible: Lessons from EMS order flow," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 551-579, June.
    4. Lucio Sarno & Giorgio Valente, 2009. "Exchange Rates and Fundamentals: Footloose or Evolving Relationship?," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 786-830, June.
    5. Kenneth A. Froot & Tarun Ramadorai, 2005. "Currency Returns, Intrinsic Value, and Institutional-Investor Flows," Journal of Finance, American Finance Association, vol. 60(3), pages 1535-1566, June.
    6. Mishkin, Frederic S, 1982. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 22-51, February.
    7. Rui Albuquerque & Eva De Francisco & Luis B. Marques, 2008. "Marketwide Private Information in Stocks: Forecasting Currency Returns," Journal of Finance, American Finance Association, vol. 63(5), pages 2297-2343, October.
    8. Hyuk Choe & Bong-Chan Kho & René M. Stulz, 2005. "Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 795-829.
    9. Abhakorn, Pongrapeeporn & Tantisantiwong, Nongnuch, 2012. "A reexamination of capital controls’ effectiveness: Recent experience of Thailand," Journal of Asian Economics, Elsevier, vol. 23(1), pages 26-38.
    10. repec:wsi:qjfxxx:v:02:y:2012:i:04:n:s2010139212500188 is not listed on IDEAS
    11. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.
    12. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-1880, December.
    13. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    14. Cenedese, Gino & Mallucci, Enrico, 2016. "What moves international stock and bond markets?," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 94-113.
    15. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2013. "Gross capital flows: Dynamics and crises," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 113-133.
    16. Chayawadee Chai-Anant & Corinna Ho, 2008. "Understanding Asian equity flows, market returns and exchange rates," BIS Working Papers 245, Bank for International Settlements.
    17. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    18. Cheung, Yin-Wong & Chinn, Menzie D. & Pascual, Antonio Garcia, 2005. "Empirical exchange rate models of the nineties: Are any fit to survive?," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1150-1175, November.
    19. Cheung, Yin-Wong & Chinn, Menzie D. & Garcia Pascual, Antonio & Zhang, Yi, 2017. "Exchange rate prediction redux: new models, new data, new currencies," Working Paper Series 2018, European Central Bank.
    20. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    21. Mintao Fan & Richard K. Lyons, 2003. "Customer trades and extreme events in foreign exchange," Chapters,in: Monetary History, Exchange Rates and Financial Markets, chapter 6 Edward Elgar Publishing.
    22. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    23. repec:wsi:wschap:9789813148543_0016 is not listed on IDEAS
    24. Martin D. D. Evans & Richard K. Lyons, 2017. "Exchange Rate Fundamentals and Order Flow," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 16, pages 645-724 World Scientific Publishing Co. Pte. Ltd..
    25. Tille, Cédric & van Wincoop, Eric, 2014. "International capital flows under dispersed private information," Journal of International Economics, Elsevier, vol. 93(1), pages 31-49.
    26. Berger, David W. & Chaboud, Alain P. & Chernenko, Sergey V. & Howorka, Edward & Wright, Jonathan H., 2008. "Order flow and exchange rate dynamics in electronic brokerage system data," Journal of International Economics, Elsevier, vol. 75(1), pages 93-109, May.
    27. Bill B. Francis & Iftekhar Hasan & Delroy M. Hunter, 2006. "Dynamic Relations between International Equity and Currency Markets: The Role of Currency Order Flow," The Journal of Business, University of Chicago Press, vol. 79(1), pages 219-258, January.
    28. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    29. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    30. Gehrig, Thomas & Menkhoff, Lukas, 2004. "The use of flow analysis in foreign exchange: exploratory evidence," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 573-594, June.
    31. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    32. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
    33. Dagfinn Rime & Hans Jørgen Tranvåg, 2012. "The Flows of the Pacific: Asian foreign exchange markets through tranquility and turbulence," Working Paper 2012/01, Norges Bank.
    34. Ahmed, Shaghil & Zlate, Andrei, 2014. "Capital flows to emerging market economies: A brave new world?," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 221-248.
    35. Carpenter, Andrew & Wang, Jianxin, 2007. "Herding and the information content of trades in the Australian dollar market," Pacific-Basin Finance Journal, Elsevier, vol. 15(2), pages 173-194, April.
    36. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, vol. 55(220), pages 437-460, November.
    37. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    38. Dagfinn Rime & Hans Jørgen Tranvåg, 2012. "Flows Of The Pacific: Asian Foreign Exchange Markets Through Tranquility And Turbulence," Pacific Economic Review, Wiley Blackwell, vol. 17(3), pages 434-466, August.
    39. Chan, Kalok & Menkveld, Albert J. & Yang, Zhishu, 2007. "The informativeness of domestic and foreign investors' stock trades: Evidence from the perfectly segmented Chinese market," Journal of Financial Markets, Elsevier, vol. 10(4), pages 391-415, November.
    40. Robin Brooks & Hali Edison & Manmohan S. Kumar & Torsten Sløk, 2004. "Exchange Rates and Capital Flows," European Financial Management, European Financial Management Association, vol. 10(3), pages 511-533.
    41. Richards, Anthony, 2005. "Big Fish in Small Ponds: The Trading Behavior and Price Impact of Foreign Investors in Asian Emerging Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 1-27, March.
    42. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    43. Lucio Sarno & Elvira Sojli, 2009. "The Feeble Link between Exchange Rates and Fundamentals: Can We Blame the Discount Factor?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 437-442, March.
    44. Gyntelberg, Jacob & Loretan, Mico & Subhanij, Tientip & Chan, Eric, 2014. "Exchange rate fluctuations and international portfolio rebalancing," Emerging Markets Review, Elsevier, vol. 18(C), pages 34-44.
    45. Dunne, Peter & Hau, Harald & Moore, Michael, 2010. "International order flows: Explaining equity and exchange rate returns," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 358-386, March.
    46. Kwabena Duffuor & Ian W. Marsh & Kate Phylaktis, 2012. "Order Flow And Exchange Rate Dynamics: An Application To Emerging Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 290-304, July.
    47. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    48. ter Ellen, Saskia & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2013. "Dynamic expectation formation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 75-97.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nasha Ananchotikul & Longmei Zhang, 2014. "Portfolio Flows, Global Risk Aversion and Asset Prices in Emerging Markets," IMF Working Papers 14/156, International Monetary Fund.
    2. Fischer, Andreas M. & Greminger, Rafael & Grisse, Christian, 2017. "Portfolio Rebalancing in Times of Stress," Globalization and Monetary Policy Institute Working Paper 322, Federal Reserve Bank of Dallas.

    More about this item

    Keywords

    Order flow; private information; exchange rate models; market microstructure; emerging markets;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:snb:snbwpa:2015-12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Enzo Rossi). General contact details of provider: http://edirc.repec.org/data/snbgvch.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.